Comments on: How Greece’s default could kill the sovereign CDS market

By: Eericsonjr

Eericsonjr — Fri, 02 Mar 2012 15:22:46 +0000

The answer to this problem is straightforward: Invent a new product to serve as “insurance” (quotes to avoid its regulation like actual insurance, which requires capital) on the CDS in question.

More fees, more paper, more “robust” (in quotes because it means “without capital”) financial system.

Innovation will solve all problems. (I mean, “innovation.”)

By: anonhfm

anonhfm — Thu, 01 Mar 2012 14:08:21 +0000

@zimbabar. 30 days for interest, but only 7 days for principal. Since March 20 is maturity, only 7 days grace. It’s all irrelevant though if Greece uses CACs under the Greek Bondholder Law. They will announce at day end on March 9 (Friday) and the bonds are all gone when you get in the office March 12th. Simply impossible to have an Auction in that space. In ISDA docs, it specifies that when Credit Event is Restructuring, CDS buyers have to be given 5 days from the event declaration to decide if they WANT to go ahead with settlement on the basis of the event.

By: zimbabar

zimbabar — Thu, 01 Mar 2012 13:59:03 +0000

The timeline is indicative. Some of you will remember the credit event on one of the Irish banks last summer. In that particular case, a restructuring credit event was triggered (via CAC) but the auction was organised within 8 days of the credit event in order to give time to market players to settle physically before the end of the tender period. I believe all investment banks played fair and settled the CDS contracts (including physical) before the end of the tender period. In this case, the issue is the very short timetable: the CAC activation and the exchange need to have a couple of weeks between them. By the way, the March 20 GGBs have a 30 day grace period!

By: Tseko

Tseko — Thu, 01 Mar 2012 13:52:36 +0000

A Greek default would certainly accelerate the second phase of the European sovreign debt crisis as many people were taken aback by ISDA’s determination committee opinion yesterday. There are some factual inaccuracies in the rest of the post and it appears that the premise is wrong as you are not really factoring in the holdouts (as an earlier comment mentions)

By: anonhfm

anonhfm — Thu, 01 Mar 2012 13:22:14 +0000

@Than, you are wrong. The problem affects all CDS settlement. You CAN’T cash settle with the old GGBs because by the time settlement occurs the old GGBs are gone. The way ISDA is playing this, the Credit Event occurs at the same time the old bonds disappear. There is no time for physical settlement with old GGB. This would be true of any Restructuring carried out via CAC

By: dman54321

dman54321 — Thu, 01 Mar 2012 10:28:42 +0000

AngryInCali – The sellers also have (The same) overpriced lawyers

Than – the point is that the price for the Cash settlement is determined by running a small scale physical settlment auction.

By: fresnodan

fresnodan — Thu, 01 Mar 2012 10:22:18 +0000

“Now they can add to that another worry: that Greece might be able to default in such a manner as to leave the ultimate value of the CDS largely a matter of luck.”
….

“But I actually believe that sovereign CDS, when they work, are rather useful things.”

I am just too stupid to understand the value of:
bonds
insurance
financial instruments

that can be worth:
full face value
partial face value
0 face value

To me, this only works because they generate fees, and the “masters of the universe” understand better than the masses that when the financal system collapses, from selling housing properties at sky high prices to 7-11 clerks with obviously fraudulent income statements in bundled “securities” that on their FACE are not just worthless, but will generate losses, that the government, using real dollars obtained from taxes (real people who generate real economic activity), makes everything all right.

If the financial institutions had taken THEIR losses, how many of these financial instruments would be around?

http://www.interfluidity.com/v2/2587.htm l

By: Than

Than — Thu, 01 Mar 2012 04:16:50 +0000

This is wrong. Look at the title of Alea’s post, Felix: it’s a timeline for PHYSICAL settlement of CDS. The auction is for CASH settlement.

Completely different settlement procedures, with completely different timelines.

By: Gennitydo

Gennitydo — Thu, 01 Mar 2012 02:41:19 +0000

Hi Felix.

I am not sure that this is right. The only way the old bonds could disappear from the market is if 90% of the holders consent to the exchange. I think that is very unlikely and near impossible. If less than 90% consent, then there will be old bonds on the market for a while and these will be traded. The vulture funds will want to consolidate their holdings to ensure they have standing when they sue the Hellenic Republic.

Now it is possible that there are specific ISINs which are fully exchanged and that any CDS written on these lines will have an issue, but this assumes that the ISDA determination committee declares a credit event solely due to the insertion of the CACs which I think is unlikely too.

By: AngryInCali

AngryInCali — Thu, 01 Mar 2012 02:04:49 +0000

While I believe anything is possible in these kind of contracts, I really doubt that bonds with a collective action clause would be covered by CDSes with such a big loophole. There is such an opportunity for rigging the game, it seems improbable that in case of replacement, all the items exchanged for the original bond aren’t priced as a package in case of a credit event.

Don’t these buyers have overpriced lawyers???